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Watching Emerging Markets For Fun & Profit

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Emerging market have been a literal roller coaster ride over the last two decades, offering nothing more than multiple ulcers to long term investors. However, it does offer the opportunist market timer with deeper pockets to buy-low/sell-high every few years; think commodity market type of movements.

Source: Yahoo Finance

It seems it’s time for another run up major to the top of coaster. Suppose you don’t find the stomach for a blast across the emerging markets (such as above). Then let’s look at a more nuanced approach, picking the individual country as a target. Below is a depiction of valuations for a collection of EM countries with an equal number of developed markets thrown in:

Data from SimplyWall.St

One can easily argue that China is too expensive despite the apparent growth potential, never-mind its impending economic collapse as the result of demographic collapse and 95 years if mismanagement.

A low P/E ratio is a double-edged sword. Low P/E can be due to either hidden value or a pathology that has cause the price to drop, lowering the ratio. To wit, Turkey is run by muzzlim dictator who thinks the cure to the current 70% inflation rate is printing more money (the last Turkish central bank chief was fired summarily for disagreeing). Brazil has recently turned socialist, while S. Africa is siding with Russia, itself another collapsing economy and demography. This leaves a few possible good targets such as Thailand, Vietnam and especially Indonesia and Mexico which seem moderately positioned but still far better than the US market.

Still no stomach for long stocks anywhere, then EM still offer great actionable information. Here is a little known secret: EM market driven rates lead the central bank policy rates by several months.

This strongly hints at an opportunity to add fixed income instruments in the EM to our collection of recommendations which for a while now has included fixed income in the US as well. In short there are strong hints that while the rates won’t be dropping (“pivot”) anytime soon (short of an above-average economic hard-landing) they are stabilizing around higher rates for years to come; a fact strongly supported by irreversible demographic trends.

The last nail is the broken down trend line and confirmation of a tepid up-trend in the US bond markets:

Happy Bonding!